Gratuity Calculator

Learn the gratuity calculation formula, eligibility, and rules to estimate your gratuity amount easily. A quick guide for employees in India.

Gratuity is a benefit paid by an employer to an employee as a token of appreciation for the employee’s dedicated service. It is a lump-sum payment made when an employee retires, resigns after certain years, or gets terminated. Gratuity is governed by the Payment of Gratuity Act, 1972, in India, which sets rules about eligibility, payment, and calculation.

This article will explain gratuity in simple terms, the formula used for gratuity calculation, important examples, eligibility criteria, and related rules you should know.

What is Gratuity?

Gratuity is a statutory payment made to employees by their employer at the end of their service period. It is like a “thank you” bonus for the years of service provided by the employee.

• It is mandatory for employers in organizations with 10 or more employees.
• The gratuity amount depends on the employee’s last drawn salary and the number of years of service.
• The purpose of gratuity is to provide employees with a financial benefit on retirement or when they leave a job after continuous service.

Eligibility for Gratuity

An employee becomes eligible for gratuity payment if:

• They have worked continuously for the employer for a minimum of 5 years.
• They retire, resign, or their service is terminated.
• In case of death or disability, the 5-year minimum service rule is waived.
• The employer has 10 or more employees covered under the Payment of Gratuity Act.

Components of Gratuity Calculation

To calculate gratuity, two important components are considered:

1. Last Drawn Salary (Basic + Dearness Allowance):
   This is the employee’s last basic salary plus dearness allowance (DA). Other allowances like bonuses and commissions are not usually included unless specified.
2. Years of Service:
   This refers to the number of years the employee has worked continuously with the organization. Any service over 6 months is rounded up to a full year.

Gratuity Calculation Formula

For Employers Covered Under the Payment of Gratuity Act, 1972. The gratuity is calculated based on a formula that considers 15 days’ wages for every completed year of service.

The formula is: Gratuity = 15 × Last Drawn Salary × Number of Years of Service / 26

Where:

• 15 = 15 days’ wages per year of service
• Last Drawn Salary = Basic salary + Dearness Allowance
• 26 = Number of working days in a month (excluding Sundays)

For Employers Not Covered Under the Act

If the employer is not covered under the Payment of Gratuity Act, the formula uses 30 days (calendar month) instead of 26. Gratuity=
15×Last Drawn Salary×Number of Years of Service/30

Why Divide by 26 or 30?

• 26 represents the average working days in a month excluding Sundays (used under the Act).
• 30 represents the total days in a month (used for employers not under the Act).

Step-by-Step Example of Gratuity Calculation

Assume:

• Last Drawn Salary (Basic + DA) = ₹40,000
• Years of Service = 8 years
• Employer is covered under the Payment of Gratuity Act.

Using the formula:Gratuity=Gratuity=2615×40,000×8=264,800,000=₹1,84,615

So, the employee is entitled to ₹1,84,615 as gratuity.

How to Calculate Years of Service?

• The total time you have served with the company is your tenure.
• Any period more than 6 months after a completed year is rounded up to the next full year.
• For example, 8 years and 7 months is considered 9 years for calculation.
• If less than 6 months beyond the completed year, round down.

Gratuity Maximum Limit

• The Indian government has set a maximum gratuity limit of ₹20 lakh (increased from ₹10 lakh recently).
• If the calculated gratuity exceeds this limit, only ₹20 lakh is paid.
• Gratuity up to ₹20 lakh is tax-exempt under Section 10(10) of the Income Tax Act.

When is Gratuity Paid?

• Gratuity must be paid within 30 days of the employee leaving the organization.
• If the payment is delayed, employers are liable to pay interest for the delay.
• The gratuity payment is typically made on retirement, resignation, death, or termination.

What if You Leave Before 5 Years?

• Generally, gratuity is payable only after 5 continuous years.
• But if an employee leaves before 5 years due to death or disablement, gratuity is payable regardless of service length.
• Some companies may offer ex-gratia payments to employees leaving early as a goodwill gesture.

Summary of Gratuity Calculation Rules

Important Points to Remember

• Gratuity is calculated on basic salary + DA only, not on gross salary.
• Commission can be included in the calculation if it is a fixed percentage.
• The Payment of Gratuity Act applies to factories, mines, plantations, railways, ports, oilfields, shops, and establishments with 10 or more employees.
• If the company has fewer than 10 employees, gratuity may still be paid, but the rules differ.
• Employers can voluntarily pay more gratuity than the statutory amount.

How to Use an Online Gratuity Calculator?

Several websites offer gratuity calculators where employees can enter their last drawn salary and tenure to get an instant gratuity estimate. Using an online gratuity calculator can help you:

• Calculate gratuity quickly without manual computation.
• Understand your financial benefits when leaving the job.
• Plan your finances better before retirement or resignation.

How Gratuity Differs From Other Benefits?

Legal References and Important Acts

• Payment of Gratuity Act, 1972 governs the gratuity payments in India.
• Section 10(10) of the Income Tax Act exempts gratuity up to ₹20 lakh from tax.
• Supreme Court rulings have clarified the interpretation of continuous service and other terms related to gratuity.

FAQs Regarding Gratuity Calculation

Conclusion

Gratuity is a vital financial benefit that recognizes an employee’s loyalty and service. Understanding the gratuity calculation formula helps in knowing what one is entitled to. The formula is straightforward: Gratuity=2615×Last Drawn Salary×Years of Service

(for employers covered under the Act).

Keep in mind eligibility criteria, payment timelines, and maximum limits. Utilizing online gratuity calculators can make it easier to estimate benefits before retirement or resignation.